Pitts v. Revocable Trust of Knueppel, 2004 WL 524952 (Wis.App., March 18, 2004)

A dispute arose between an underinsured motorist (UIM) coverage provider and its injured insureds. After a car accident, the tortfeasor's insurer offered policy limits, and the tortfeasor personally offered an additional settlement payment to the injured insureds. The UIM carrier, whose consent was required before any such settlement could occur, rejected the limited additional monies offered. The UIM carrier’s insureds filed a motion seeking to require the UIM provider to either consent to the settlement (with the effect of waiving its subrogation rights against the tortfeasor), or pay the settlement amount directly to the injured insureds while preserving its subrogation rights against the tortfeasor.

In Vogt v. Schroeder, 129 Wis.2d 3 (1986), the Wisconsin Supreme Court faced a similar situation, differing mainly in that the settlement offer in that case was from only the tortfeasor's insurer, rather than from the tortfeasor directly. The court held that the UIM provider was required, as a matter of equity, to either consent to the settlement or substitute a payment of its own to the injured insureds.

The issue in this appeal is whether a similar requirement should be imposed on these facts, i.e. where the payment above policy limits would come directly from the tortfeasor. After the tortfeasor’s liability carrier offered a settlement of its policy limits, the plaintiffs’ UIM provider paid them that amount to preserve its right to seek subrogation from the tortfeasor in the event that a UIM claim was made. As noted above, the tortfeasor offered a further settlement of $40,000. The plaintiffs then brought the UIM provider into the case, and filed a motion for declaratory judgment to compel it to consent to the settlement or substitute its own payment to them. The trial court denied the motion, and the plaintiffs appealed.

The plaintiffs argued that the court in Vogt created an extra-contractual, equitable remedy that properly balances the interests of insurers and injured insureds. They further argued that the equitable considerations present in Vogt are also present in this case, because it makes little equitable difference whether the settlement is coming from the tortfeasor's insurer, as in Vogt, or from the tortfeasor directly, as here.

In response, the UIM provider argued that because its policy language provides for a Vogt-like substitution when the victim settles with the tortfeasor's insurer, that language necessarily implies that no such substitution is required under any other circumstance, such as settlements with persons other than the tortfeasor's insurer. It further argued that the "trust agreement" provision in its policy bars the imposition of a consent or substitute requirement. Finally, it asserted that allowing a plaintiff to settle directly with a tortfeasor, thereby depleting the tortfeasor's assets, would directly contravene the UIM carrier's right to seek subrogation against the tortfeasor.

As resolution of this issue will require interpretation or clarification of the Vogt decision to determine whether it applies to the current facts, and because Vogt was a decision of the Wisconsin Supreme Court, the intermediate level appellate court decided that the state’s high court was best suited to determine the scope of the equitable procedure it created in Vogt, and certified the issue for the higher court to decide.

Practice Tip:

1. The law in this area is obviously in flux at this time in Wisconsin, and the direction of the law is fairly debatable. If the issue arises in the handling of a similar manner now (i.e. before the supreme court decides the case), a UIM carrier would be within its rights to neither consent nor advance monies offered by a tortfeasor. On the other hand, such a carrier must balance its view of the recovery potential of the third-party claim along with any expenses or costs incurred in litigating this issue among the concerned parties.